P12-21

REQ 1:
CM lost if the flight is discontinued
Flight costs that can be avoided if the flight is discontinued:
Flight promotion
Fuel for aircraft
Liability Insurance(1/3 x $4,200)
Salaries, flight assistants
Overnight costs for flight crew and assistants
Total Costs savings if the flight is discontinued
Net decrease is profits if the flight is discontinued
REQ 2:
This goal of increasing the seat occupancy could be obtained
by eliminating flights with a lower-than-average seat occupancy.
By eliminating these flights and keeping the flights
with a higher-than-average seat occupany, the overall average
seat occupany for the company as a whole would be improved.
This could reduce the profits in atleast 2 ways. 1st, the flights
are eliminated could have CM that exceed their avoidable costs
(see REQ 1). If so, the profit will decrease. 2nd, these flights might
be acting as "Feeder" flights, bringing passengers to cities where
connections to more profitable flights are made.
 ($12,950)

750
5,800
1,400
1,500
300
9,750
($3,200)
P12-23
REQ 1:
Costs avoided by purchasing the tubes:
DM ($3.6 x 0.25)
DL ($2 x 0.10)
Varaiable manufacturing overhead($0.5 x 0.1)
Total costs avoided or Actual cost to Make

Costs of purchasing the tubes from the outside

Costs savings per box by making internally
Note: The relevant cost of making One box of tube is $1.15
and the rest of them($7-1.15) is irrelevant. Means actual cost
of making 1 box of tube is $1.15. Therefore, the Company
should make it internally and reject the offer from outside.

REQ 2:
The maximum purchase price would be $1.15 per box
The company would not be willing to pay more than
this amount because the $1.15 represents the cost of
producing one box of tubes internally, as shown
in REQ 1. To make purchasing the tubes attractive, the purchase
price should be less than $1.15 per box.

REQ 3:
At a volume of 120,000 boxes, the company should
buy the tubes:
Cost of making 120,000 boxes x $1.15
Rental cost of equipment
Total costs of Making

Cost of buying 120,000 boxes x $1.35 per box

Cost of buying is < Cost of Making
REQ 4:
The company should make the 100,000 boxes tubes
and purchase the remaining 20,000 from outside:
Cost of making 100,000 boxes x $1.15 per box
Cost of buying 20,000 boxes x $1.35 per box
Total Costs
Because the amount of cost under this alternative is
$20,000 less than the best alternative in Part 3, the
company should make as many tubes as possible with
the current equipment and buy the remaining tubes
from outside supplier. The company does not have to pay
Rental cost for additional Equipment in this approach.

REQ 5:
The management should take into account at least the
following additional factors:

a. The ability of the supplier to meet required delivery

schedules.
b. The quality of the tubes purchased from supplier.
c. Alternative uses of the capacity that would be used to
make the tubes.
d. The ability of the supplier to supply tubes if volume
increases in future years.
e. The problem of finding an alternative source of supply
if the supplier proves to be undependable.
 $0.90
$0.20
$0.05
$1.15

$1.35
$0.20

$138,000
40,000
$178,000

$162,000
$115,000
27,000
$142,000
E12-10
The target production level is 40,000 starters per pound,
as shown by the relations between per-unit and total FC.

DM
DL
Varaible manufacturing overhead
Supervision
Total Costs

The Company should Make the Starters. Making the Starters

will result in a $0.50 per Starter cost savings or total savings
$0.5 x 40,000 = $20,000.
Cost Per unit MAKE BUY
$3.10
$2.70
0.6
1.5
$7.90 $8.40
E12-12

1. Total DM Cost required per unit

2. Cost per pound
3. Materials (in Pounds) required per unit (1 / 2)
4. CM per unit
5. CM per pound (constrained resource) of materials used (4/3)

The Company should accept order first for Product C, second for
A and lastly for B.
Product - A Product - B Product - C
$24 $15 $9
$3 $3 $3
8 5 3
$32 $14 $21
$4 $2.80 $7
E12-13
Sales value after further processing (7,000 Q x $12) $84,000
Sales value at the split-off point (7,000 Q x $9) $63,000
Incremental revenue from futher processing $21,000
Cost of further processing 9,500
Profit from further processing $11,500

The $60,000 cost incurred up to the split-off point

is not relevant in a decision of what to do after the
split-off point.
E12-14
REQ 1:
Fixed cost per mile($3,200 / 10,000 miles)
Variable operating cost per mile
Average cost per mile

Depreciation $1,600
Insurance 1,200
Garage rent 360
Automobile tax and license 40
$3,200
REQ 2:
Depreciation is a sunk cost, automobile tax, Insurance
costs are irrelevant. Decrease in resale value of the car, Variable
operting cost is relevant. The garage rent is relevant only if she
could avoid payng part of it if she drives her own car.

REQ 3:
When figuring the incremental cost of the more expensive
car, the relevant costs include the purchase price of the new
car (net of the resale value of th old car) and the increases in
the fixed costs of Insurance and automobile tax and license. The
original purchase price of old car is a sunk cost. The variable
operating cost would be the same and
therefore is irrelevant.
$0.32
0.14
$0.46